The subject of so-called “minibonds” has become, or perhaps it’s back to being, particularly topical, following the recent conversion into law of the decree-law named Destinazione Italia at the end of February, which contains a number of provisions that integrate the rules governing the issue of bonds and similar securities by non-listed companies. The matter was already dealt by the Monti government into the law Decree “Sviluppo Italia” then converted into law.
The expression “minibond” - term used to describe the new instrument - is a not-technic expression, of which there is no trace in the various legislative provisions mentioned, and which does not refer to a new category of securities. The term includes bonds in general and other securities so-called similar (i.e. debt securities of limited liability companies according to Article 2483 of the Italian Civil Code and equity financial instruments according to Article 2346 of the Italian Civil Code in the form of loans), as well as the particular category of “equity bonds” with subordination clause - already provided for by Article 2411 of the Italian Civil Code.
The prefix “mini” would appear to refer the size of the bond loan. However, if we examine the 20 and more issues that applied the new rules since 2012, we can observe that, most of them were for a considerable amounts, ranging from EUR 200 to 700 million (see the Wind, Ferrovie, Cerved loans).
The amount of the minibond’s issues could be deemed in refer to the bond issuer, but even from this point of view, we can see that the only types of companies to which the new rules are not addressed are, on the first side, banks and so-called large issuers, i.e. listed companies, and, on the other, microenterprises (less than ten employees and less than EUR 2 million in annual turnover) on the other.
Instead it can be said that with the process started with the law Decrees (Article 32, Italian Decree-Law 83/2012, converted into Italian Law 134/2012; Article 36, Italian Decree-Law 179/2012, converted into Italian Law 221/2012) and pursued until the conversion of the “Destinazione Italia” Decree (Article 12 Italian Decree-Law 145/2013, converted into Italian Law 9 of 21 February 2014), mainly thanks to the efforts of the Ministry of Economic Development and its secretariat, a liberalisation reform implemented in order to remove the legislative’s obstacles of access to the debt capital market by non-listed small and medium sized enterprises, and, in particular, for those with a turnover in excess of 2 million.
In general “minibonds” are a financial instrument providing to small and medium sized companies a further opportunity to access credit, in order to reduce their dependence on the banking system, thus creating the same “debt market” for Italian SMEs that has already been provided in the more advanced European financial and industrial systems.
This measure should have a strong impact on our economic system, which as we know has always focused on small and medium sized enterprises. The number of Italian enterprises with a turnover between 5 and 250 million that could issue minibonds is estimated approximately in thirty-five thousand.
First step in the reform was the amendment of the Article 2412 of the Italian Civil Code, which removed the quantitative limits generally established for bond issues by non-listed companies (i.e. twice the share capital and reserves) if they:
Are intended to listing in regulated markets or in multilateral trading facilities (e.g. “Extra Mot Pro”, the Borsa Italiana platform fully dedicated to the listing and trading of minibonds, which provides regulatory relief, such as exemption from the obligation to publish a listing prospectus according to the Prospectuses Directive); or Entitle the holder to purchase or subscribe shares.
Second step in the reform consisted in amendments on the taxation applied to the minibonds for both underwriters and issuers.
The substitutive tax regime set forth in Italian Legislative Decree 239/1996 has been extended to the interests received by underwriters, in place of the withholding tax referred to in Article 26 of Italian Presidential Decree 600/1973. Accordingly, when certain conditions are fulfilled, interests shall be received by underwriters gross of withholding taxes and substitute taxes.
As for issuers, the reform provided that the system of non-deductibility of interests expense set forth in Article 3(115) of Italian Law 549/1995 no longer applies. Issuers may therefore deduct the interests to be paid to underwriters from corporate income, with the only limitation by Article 96 of Italian Presidential Decree 917/1986 (Consolidated Income Tax Law).
Lastly, for the purposes of indirect taxes, the legislator extended the optional system governed by Italian Presidential Decree 601/1973 to include minibonds. This system entails the application of a 0.25% substitute tax, in place of the indirect taxes (registration tax, stamp duty and mortgage tax) normally applied to securitised loans. The decision to opt for the substitute tax system must be stated in the resolution that approving the bond issues and, if the bonds issued are secured by real estate mortgages, it allows the issuer to avoid the ordinary more burdensome taxation system – i.e. registration and mortgage taxes on a proportional basis (up to 3% of the secured amount).
On the matter of guarantees, it is pointed out that the reform extends to bond issues under Article 2410 of the Italian Civil Code, and therefore also to minibonds, the applicability of the special lien on movable assets used in a business (e.g. existing and future plants and works, concessions and capital goods, raw materials, etc.) under Article 46 of the Consolidated Law on Banking which previously could only secure medium-long term banks loans provided by banks.
Lastly, the Destinazione Italia Decree has reformed the securitisations Law no. 130 of 1999, extending their application to transactions implemented through underwriting, even at the issue date, and purchase of bonds and similar securities.
In terms of timeframes, the issue of a minibond requires an average of 3 to 4 months. The main steps of the issue are:
Preliminary analysis of feasibility of the transaction;
Transaction structuring phase with specific regard to the terms and conditions of the bonds (e.g. duration of the loan, applicable interest rate, overall amount involved in the issue, sureties, etc.);
Assessment of the issuer by a rating agency (if any, assignment of a rating is not required by law, but may be advisable in order to make the investment more attractive to investors);
Search for potential investors;
Issue of the securities.
As above mentioned, securities issued by SMEs may then be listed in a segment of the market dedicated to these instruments by Borsa Italiana. The new professional segment of the ExtraMOT market, ExtraMOT Pro, is in fact dedicated to the listing of bonds (minibonds), commercial papers, equity instruments and project bonds. The new segment was established to offer Italian SMEs a flexible, economic and efficient domestic market on which to take advantage of the opportunities and the tax benefits arising from the legislative framework described above. In order to facilitate listing procedure (below outlined), the latter has in fact been simplified compared to the procedures for listing securities in other Borsa Italiana markets. Even though the segment dedicated by Borsa Italiana to minibonds has the same structure as the ExtraMOT market, it is exclusively intended for qualified investors.
In the event of listing on the Extra MOT Pro segment, the issuer must fulfil a number of obligations and satisfy certain conditions. Specifically, it must:
Have published the financial statements of the last two years, the last of which audited (the audit mandate must be assigned to an external party, either a chartered accountant or an auditing firm, and cannot be performed by the issuer’s control body or by any of its members);
Publish a prospectus (according to European regulations 809/2004) or, alternatively, an admission document stating:
Persons in charge;
Information on the issuer (e.g. issuer’s history, description of main activities, etc.);
Financial information on the issuer’s assets and liabilities, financial position and profits and losses;
Information on the financial instruments (e.g. amount, interest rate, maturity date, issue date, currency, etc.);
Admission to trading and trading procedures
After listing, the issuer must publish the audited annual financial statements and provide information on any amendment to the rights of holders of the bonds issued and listed (known as Price Sensitive Information). To conclude, the regulations define the presence of a specialised operator to support the security’s liquidity as optional.
The main investors on the minibond market should be dedicated investment funds which have the possibility of combine a number of issues of different SMEs in a single portfolio, removing the dimensional problem and the risk on a single issuer.
In December 2013 approximately 24 investment funds had already been set up, or were being set up, with estimated total deposits of EUR 3.3 billion and approximately 650 executable transactions. It is realistic to believe that a good number of these funds shall actually be able to start operations in the second half of 2014.
The fund units should mainly be subscribed by large institutional investors (bank foundations, pension funds, social security funds, insurance companies, etc.) and in fact the Destinazione Italia Decree changed prevailing legislation in order to facilitate their entry into the minibond market. In particular, it is provided that:
Banks may structuring covered bonds using minibonds, instead to use other covers as previously provided;
Insurance companies may invest up to 3% of technical reserves in minibonds issued by non-listed SMEs, in units of funds that invest predominantly in said assets (raising the limit set as threshold for concentration on a single fund from 1% to 3%) and also in securities issued by securitisation companies (even without rating);
Funds that invest in minibonds may be beneficiaries of the sureties provided by the SME Central Fund. In this regard, the possibility was introduced for the Fund to also give direct sureties to asset management companies that, on behalf of the mutual investment funds managed by them, underwrite bonds or similar securities issued by SMEs (the surety may be granted for both individual transactions to underwrite bonds or similar securities and for portfolios of transactions).
Despite what has been stated so far, at the moment deposits gathered by minibond funds appear to progressing slowly, to the extent that Cassa Depositi e Prestiti is taking action to set up a fund of funds precisely intended for investment in minibond funds. SACE also appears to be finalising a project for a closed-end fund with deposits that should reach approximately EUR 350 million, which should be entirely dedicated to investment in minibonds, for which its endorsement shall be automatically provided, with the effect of mitigating the credit risk for investors.
At this stage, the real question is whether or not minibonds shall actually be able to provide an alternative new asset class to sovereign and large corporate securities. Only if the answer is yes shall we be able to say that the reform has achieved its goal.